| |
| |
|
Investing Information |
|
|
|
Sell Discipline for Investors: Importance and Execution
Investors usually don't have an aversion to buying an asset. The real gut wrenching decision is when - and if - to sell. What most don't realize (or don't want to realize) is the overwhelming importance of the sell decision. Let's explore the reasons why and the techniques that can calm a seller's nerves. Finding reasons not to sell an asset is as easy as finding a reason to avoid a root canal. Have you ever heard (or told yourself), "I can't sell now, it's too low!" or, "The analyst at XYZ brokerage says the price is going through the roof!" or, "I don't want to pay the capital gains tax!" Let's look at each of these "justifications" in the context of their impact on an investment portfolio and techniques to avoid having to come up with them: "I can't sell now, it's too low!" If an asset's price has fallen dramatically, there is usually a fundamental problem. Often, that fundamental problem then becomes a technical problem. In other words, as market participants see dramatic declines in price charts, panic sets in and the "heard" starts to chase the price down even more (reference the NASDAQ Index from February of 2000 to September of 2002). Once an asset has been trampled, it is extremely difficult and time consuming to resuscitate. Sell technique: First of all, don't let prices fall "too low". Set a predetermined point to sell if the asset price drops and stick to it. Execute a stop loss order so discipline is not an issue. Note - selecting a selling point doesn't have to be complicated process. Either determine where your "pain threshold" is in terms of market value or percentage losses and mark that point. Or look at a historical price chart and look for "floors", which are price points where the price seems to repeatedly bounce back up. If the price falls below that point, it's often a point of no return. If you continue to "like" the security even though the price has declined, determine a price to repurchase the asset AFTER a positive price trend has developed. Finding the absolute price bottom is like trying to catch a falling knife. Use a "buy stop" order to make sure you purchase the security at your predetermined point. "The analyst at XYZ brokerage says the price is going through the roof!" We have observed numerous cases in which Wall Street analysts have been penalized for lining their pockets, or those of their firm, by producing biased research articles designed to impact prices in their favor. Analyst hype can only take a security to a point, after which it must stand on its own merits. Investors beware! Avoidance technique: Let's assume that analyst Rich Buyhype is right and the asset advances upward. First of all, let's follow the previous technique and execute a stop loss order. Then, if the asset appreciates in price, periodically move the stop loss price up proportionately with the price increase. This is known as a "trailing stop". Most brokerages will allow their investors to change their stop losses easily without a charge. "I don't want to pay the capital gains tax!" An overwhelming amount of stock investors would have loved to have paid capital gains taxes in 1999. Most would have paid considerably less than they ended up losing in market value over the next 2 years. Keep in mind the capital gains tax applies only to the amount of the gain, not the value of the asset. A 15% capital gains tax payment is less than a 15% loss in market value, unless the asset has no cost basis. Avoidance technique: Unfortunately we can't avoid paying taxes on realized gains. But we can sell assets and avoid losses greater than the tax paid. Don't let the tax tail wag the investment dog. If an asset hits your stop point, sell it and don't look back, whether it's at a gain or a loss. After all, unless the tax law changes, you'll have to pay gains on the sale at some point. Summary Selling a security to lock in your profits can be a very useful strategy, but it is sometimes difficult to execute. If you don't have the discipline to sell at a predetermined point (most investors don't), set a stop loss order so the trade will happen automatically. Use the trailing stop loss technique if your asset is appreciating to lock in your gains. These strategies work especially well in situations where capital gains taxes aren't an issue. However, keep in mind the many of the wealthiest investors pay substantial taxes because they identify the right points to lock in profits and avoid large losses. Please visit our website at www.limestone-capital.com to learn more about sell discipline and active investing. Rob Hounshell is President and Chief Investment Strategist of Limestone Capital, a registered investment advisory. He holds the Chartered Financial Analyst and Certified Financial Planner designations. He has been managing investments for 18 years.
MORE RESOURCES:
Investing - Google News |
|
|
|
RELATED ARTICLES
Landlording 101, Tricks of The Trade Looking Inside Your Tenant's Mind Basic Mind-Reading Report 101 for LandlordsIt goes without saying but I will say it anyway. The better you understand your tenants and their personal situation, the better you can serve their needs and your own. Waiting 20 Years Can Cost You Millions - Dont Wait Start Today Many Young people live for Today. They really don't fully understand the power of compound interest. What Age Should I Start Saving For Retirement? Ask this question to 100 people and you will receive 100 very different answers. The fact of the matter is there is no right age to start. The Dreaded Direct Question (Please have a glass of water within reach before reading this article.)Your personal financial planning is the topic of discussion here today, but not quite yet. Retirement or Financial Freedom? In the past most people never retired. They died. Why Do You Want to Become a Online Trader? Motivational guru Tony Robbins teaches that the reason for doing something rates much higher than the methods you use to get the job done. In order to make your goal REAL, you need to attach severe, horrifying, intense and profound fear to failure. The Demise of Buy & Hold Based on consistent results I think Buy & Hold should be renamed Buy, Hold & Bye-Bye. It sounded great for a while, especially for the huge majority of investors who don't have the time or interest in really doing due diligence on investments. Porters Five Forces Analysis If you've ever listened to Warren Buffett talk about investing, you've heard him mention the idea of a company's moat. The moat is a simple way of describing a company's competitive advantages. Making It Second Nature Not long ago I was laying on my son's floor throwing one of his toy balls back and forth in the air to myself and I had a strange revelation. I noticed that as I threw the ball up in the air my left arm automatically started to move to where the ball was going to come down. Franchise Opportunity Sellers Beware; franchise buyers lie on forms? It seems completely absurd that franchise buyers lie about their financial position, available cash and abilities in order to buy a franchise. After spending 8 years setting up franchises around the nation and fielding inquiries I am appalled at the lack of integrity of the average business buyer. California Deparment of Corporations and Franchise Opportunities Law What CA Needs To Do To Address Issues in FranchisingWe should not allow anymore degradation of California through incessant over regulations in the franchising sector. No other sector of our economy provides as many jobs as franchising. What is an Investor Ready Business Plan A Business Plan, as all good entrepreneurs starting out in life should know is the foundation, or rather a springboard, towards the establishment and growth of a new business. A business plan is an essential tool for companies raising capital - and your business plan needs to be Investor Ready. Buying Florida Investment Properties and Where Its Hot Relaxing in Style: Florida Investment PropertiesIn Florida, relaxing in the sun and sand is a way of life. There's no better way to experience a slice of Florida living than buying your own space. Stock Market Leaders and Laggards Leaders are stocks that breakout immediately when the market confirms a new rally. In the first several weeks, strong stocks with leadership ability will breakout on volume above their 50-day average. Foreign Investing - US Investors Still Missing Out? Investors are still too slowly realizing what the academics have long pointed out -- adding foreign stocks to your portfolio will, over the long term, increase your returns and lower the overall risk of your portfolio.US investors embracing foreign investing are both realists and optimists. An Old Dividend Stock Investment Idea, for a New Generation Death and taxes! The certainties of life! And then, of course, there are the mortgage payments, the utility bills, phone bills, the car payments and thirsty automobiles. Add that to the grocery and clothing bills, and there appears to be more then just death and taxes as certainties of life. The Benefits of Laddering Your CD Investments If you've decided to stock some money away in a certificate of deposit, why not reap the highest benefit over time by laddering your CD investments? What's a CD latter? I'm glad you asked.A CD ladder is made up by purchasing several CD's at one time with different maturity dates. The Perfect Economy? The U.S. Coca-Cola - A Value Stock? There has been much talk lately about Coca-Cola and its potential as a value stock - as it now spots a dividend yield of 2.6% (which is the highest dividend yield since the late 1980s) and a P/E or less than 21 - right at the bottom of its five-year low. Keep Stock Market Investment Profits Have you had one of those huge investment winners - a stock that went from $2.00 to $80.
|
| home | site map |
| © 2006 |
